The London Metal Exchange‘s “ring” is being moved and steel imports into the US hit 29% of the market in 2015.
LME Moves its Ring
The 139-year-old London Metal Exchange (LME) wrapped up open outcry trading on Wednesday at its red leather couch “ring” before moving the trading floor to a new home, Finsbury Square, in London’s financial district.
The LME, the world’s biggest market for base metals such as copper and aluminum, is the only financial exchange to maintain open outcry trading in Europe. While the ring is being moved to the new location today and tomorrow, trading will take place at the LME’s disaster recovery site in Chelmsford, east of London.
Steel Imports Into the US Hit 29% in 2015
Based on preliminary Census Bureau data, the American Iron and Steel Institute (AISI) reported that the US imported a total of 2,323,000 net tons (NT) of steel in December 2015, including 2,017,000 NT of finished steel (down 5.3% and up 3.2%, respectively, vs. November final data). Full Year 2015 total and finished steel imports were 38,718,000 and 31,425,000 NT, respectively, down 13% and 7%, respectively, vs. 2014. Finished steel import market share was an estimated 26% in December and is estimated at 29% for the full year.
Key finished steel products with a significant import increase in December compared to November were wire rods (up 77%), tin plate (up 71%), cut lengths plates (up 65%), heavy structural shapes (up 46%), hot rolled bars (up 20%) and cold rolled sheets (19%). Major products with significant import increases in 2015 vs. the prior year include reinforcing bar (up 38%) and standard pipe (up 13%).
The rolling average of steel imports into the US in 2015 vs. 2014. Source: AISI
Will NAS implement another base price increase effective in March or April? Last month, NAS, never known to be a follower, announced a base price increase which was half that of its competitors Allegheny Technologies, Inc. (ATI), AK Steel and Outokumpu Coil Americas. This meant that the only increase buyers would be paying was the less aggressive 2-discount point adjustment (approximately $0.04 per lb. increase on 304 base gauge).
Will NAS increase base prices in March or April? Source: Adobe Stock/Jovanning.
Stainless base prices may have gone up since January 1, but buyers should still be paying a lower net price for standard 304 2B this month than they did in December. The increase on base gauge 304 was offset by the over $0.05 per lb. decline in the 304 alloy surcharge. 304 Base gauge net prices should decline in February since NAS’ February 304 alloy surcharge will be $0.3321 per lb., which is $0.0031 per lb. less than the January surcharge.
North American Stainless’ Market Position
NAS is in the best position to endure depressed stainless prices longer than any of its North American competitors, but now they are losing money, too. Acerinox, NAS’ parent company from Spain, posted a loss of over €8 million in Q3 2015, after being in the black the previous three quarters. Acerinox’s 2015 results will not be announced until February 29, but I would expect the results to be worse as alloy surcharges continued to decline through the end of 2015.
I believe NAS will announce another base price increase once its March production is filled, which should be in the next week. The base prices in Q4 2015 were unsustainably low as a result of Outokumpu Coil Americas’ push to fill its Calvert mill with lower prices than NAS.
As long as mill lead times remain in check, service centers will support the domestic mills so that they can keep inventory as lean as possible while still being able to provide for the manufacturer’s requirements. My experience has been that when alloy surcharges are still declining, price increases are easier for the market to accept. Another base price increase is not only feasible for March or April, it is necessary to realign base prices to manageable levels for producer, service center and manufacturers. NAS needs to lead the next price increase and act like the market leader.
With sanctions lifted Iran is joining the international community and steel supply and production deals are a big part of their entrance.
POSCO Buys Into Iranian Steel Mill
South Korea’s POSCO plans to sign a preliminary agreement with Iranian steelmaker PKP in March to buy a stake in a $1.6 billion steel mill project in the Middle Eastern country, a source with knowledge of the matter told Reuters.
In September, the firms signed a memorandum of understanding to build the plant with an annual production capacity of 1.6 million metric tons in Iran’s Chabahar free economic zone and Reuters’ source says more business is on the way now that sanctions have been lifted.
Danieli Will Sign Iranian Steel Contracts
Italian steel firm Danieli will sign about $5.7 billion in commercial agreements with Iran during President Hassan Rouhani’s visit to Rome this week, a company spokesman confirmed on Monday.
A government source told Reuters earlier that the contracts were worth about $4 billion, but a company spokesman later said the total value of the agreements was higher and included a joint venture with other international investors, including Iranians.
The joint venture, worth $2 billion, will be called Persian Metallics, the Danieli spokesman said, giving Reuters further details.
The price of oil slipped below $27 this week and panic ensued in places other than the disco. Global stock markets fell as investors feared the worst and followed the Royal Bank of Scotland‘s advice and sold everything but bonds.
The Dow Jones industrial average was down more than 8% on the year and US equity funds have fared even worse. They were down 10.4% earlier this week. After a steep sell-off Wednesday, global stocks were mixed Thursday with Asian markets continuing the previous trading session’s sell-off as oil prices continued to fall. European and then US stocks got a lift after the European Central Bank hinted at further stimulus measures.
Can the US steel industry finally catch a break? Source: Adobe Stock/Inzyx.
My colleague Stuart Burns adroitly pointed out that while commodities such as oil, and the metals we track daily, are oversupplied, none of this has anything to do with demand. Most of the panicked investors are scapegoating China and demanding more stimulus, a course of action that would actually worsen the oversupply and the slowing economy there.
Like a tourniquet applied to stanch the bleeding of a limb injury, the oversupply that oil drillers and miners have built up to force out competitors — and the currencies purposely devalued to encourage exports — are now figuratively killing the limb.
Of course, that doesn’t mean the State Reserves Boardwon’t try it.
I am the oversupply. Fear me.
Producers have been, to a large extent, their own worst enemy. Just look at the position Freeport McMoRanhas put itself in, divesting part of its largest asset, the Glasberg mine, and all.
In times like these, we like to accentuate the positive. Steel-Insight’s James May reports that, thanks to anti-dumping actions and falling capacity, US steel mills are finally in the “sweet spot” that will allow prices to rise.
What a concept, eh? Rising metal prices. My colleague Raul de Frutos helpfully pointed out this week that we’ve actually been in a bear market for awhile and it could keep going so long as that pesky oversupply is there. Even that “sweet spot” James mentioned for US steel mills is a short-term thing. A paper ring. Prices will fall back to earth later in the year.
An appeals court will allow the EPA Clean Power Plan to stay in effect while it is argued in court and China’s plans to tame its largely state-run metals producers are starting to become more clear.
Clean Power Plan Will Stay in Effect
The Washington D.C. Circuit on Thursday refused to put the Environmental Protection Agency Clean Power Plan on hold until legal challenges to the rule are completed, but they did fast-track a trial on the legality of the new rule.
The Obama administration considers this an early victory as it looks to defend and implement the sweeping regulations that would slash carbon emissions from existing power plants.
29 States and several industry groups petitioned to overturn the CPP or, at the very least, block it from being implemented while the legal battle plays out. They’ve argued that they’ll be irreparably harmed by starting the compliance process, even though they’re likely to succeed in convincing the court that the rule is illegal.
However, the D.C. Circuit panel shot the request down in a two-page order, though it said the appeals court would expedite the consideration of the case and schedule oral arguments for June 2.
China’s Metals Transition Plan
China’s plans to set up funds to manage coal and steel capacity closures and stockpiling schemes for metals such as aluminum have offered nervous markets some clarity on the likely future make-up of the country’s sprawling and predominantly state-run metals and mining industries. But it’s still way too early to tell if these initiatives even can be successful in taming overproduction.
As the world’s largest producer of aluminum, steel and other metals, and the biggest consumer of copper and iron ore, China is crucial to global metals markets which have slumped in the past year as Chinese industrial demand growth slowed.
After weeks of talks between government officials and leading metals producers, Beijing looks set to take a direct approach to managing capacity cuts and layoffs in coal and steel. It will provide smaller-scale financing deals to groups of producers of non-ferrous metals, such as aluminum, for stockpiling and capacity cutback initiatives.
US industrial output has been falling on a month-on-month basis since August and the manufacturing PMI fell below 50 in late 2015. Even with the bounce in January PMI data to 52.7, the manufacturing outlook remains uncertain after an extended period of weakness and continued currency strength.
Yet, we suggest that US mills are (right now) in a sweet spot in terms of pricing. Are we crazy?
After a dismal 2015, steel mills are finally in a position to drive prices higher. It may not be for long, but any buyers that are short of flat steel in the short term will have to pay substantially higher prices in the next few months. We suggest that prices could rally $100-150 a ton between December 2015 and April/May 2016.
Supply Finally Constrained
Import and domestic supply is curtailed. US mills operated at 60-65% capacity in December.
With continued uncertainty regarding anti-dumping actions, finished steel imports are slowing. Importers cannot start selling again until final determinations are in, meaning that June arrivals are probably the earliest.
Freeport McMoRan is selling part of a major Indonesian asset to generate cash as iron ore prices keep falling. The International Energy Agency said oil prices will fall even lower this year.
Selling Part of its Crown Jewel
Freeport McMoRan‘s Indonesian unit has submitted a divestment price to the Indonesian government for an additional stake in one of the world’s biggest copper mines, an energy ministry official said last week.
Freeport Indonesia must sell the Indonesian government a 10.64% stake of the huge Grasberg copper and gold complex in remote Papua as part of the process to extend its right to operate beyond 2021.
Freeport valued its Indonesian asset at $16.2 billion, Bambang Gatot, the ministry’s director general of coal and minerals told Reuters and other reporters, adding that the divestment offered to the government was worth $1.7 billion.
IEA: Yes, Oil Could Go Lower
The oil price is set to fall further this year as supply vastly exceeds demand, with major oil exporter Iran’s return to the market offsetting any production cuts from other countries, the International Energy Agencytold Agence France-Presse on Tuesday.
“Can it go any lower?” the IEA asked in its monthly oil market report.
“Unless something changes, the oil market could drown in over-supply. So the answer to our question is an emphatic yes. It could go lower.”
Just like Oprah giving out cars, our January Metal Price Trends report was generous with the dead cat bounces this month. You get a dead cat bounce, copper! You get one, too, aluminum! You get a dead cat bounce, raw steels! Everyone gets a dead cat bounce!
Okay, not everyone. Construction, stainless steel, renewables and rare earths all lost ground and automotive was merely steady.
Still, it’s the most positive movement we’ve seen for many of these metals since early last year. We say they’re dead cat bounces — a cruel-sounding investment term for a temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend (sorry, kitties) — because there is little reason to be optimistic that any of these gains will continue.
Stop Me Before I Bounce Again!
The main driver of commodity, and now stock market losses, has been the slowing Chinese economy and it’s looking worse this year than it did at the end of last. Financial institutions such as RBS are even advising clients to sell everything, save bonds, that’s not tied down.
This is great news for buyers but exactly what metal producers don’t want to hear. What’s worse, for them, is that everything the Chinese government is doing to try to turn their economy around, including a panic button system for its stock markets that actually caused more panic, isn’t working. My colleague Raul De Frutos also pointed out that purposely devaluing the yuan actually hurts metal prices.
How Low Can it Go?
The other big driver of the commodity price rout, the price of oil, shows no signs of turning around, either. Oil hit $30 per barrel this week stoking bankruptcy fears among US energy companies and it even temporarily created some nervousness among OPEC nations who clamored for an emergency meeting.
So don’t expect these price increases to continue as transportation and production costs follow oil’s race to the bottom. My colleague at our sister site Spendmatters, Kaitlyn McAvoy, reported that Goldman Sachs is predicting $20 per barrel for oil this year. It’s not a very happy new year for metal producers… or cats.
But even though December’s strong import figure of 96.27 million metric tons will boost 2015 iron ore imports to 953.36 mmt, nearly one billion, it masks an edifice that is crumbling before our very eyes.
Source: Business Insider Australia
China’s iron ore imports are so high in part because domestic miners have finally begun to respond to the current low price situation and shutter production. Port stocks have risen in line with imports. Inventories have been rising for six of the last seven weeks, according to Bloomberg to 93 mmt.
Chinese Steel Production
China is churning out steel in spite of a slowdown in domestic demand with its surplus powering rising exports. China’s steel exports rose by almost 20% in 2015 to a record 112.4 mmt. To put that in perspective that is enough to meet demand in Germany and Japan for a year and still leave almost 9 mmt to spare.
It’s no secret that for the last four years the global steel sector has been floundering and it’s been tough for producers to find any silver lining. Now, with 2016 upon us, the one question that’s been asked by everybody, even as prices plunge and the Chinese economy shows no signs of a recovery, is, what now? The unanimous response from around the globe is India.
Can Indian steel demand buoy the sector this year? Source: Adobe Stock/Jovanning.
There’s a lot riding on India, both domestically as well as internationally. Ironic, since both China and India are the world’s top two emerging economies, and with the collapse of China, the world turns to its neighbor India, in these times of stress.
India to the Rescue?
Edwin Basson, Director-general of the World Steel Association (WSA) echoes these voices in this article in The Gulf News where he was quoted as saying that there was really only one location that had the long-term potential to pull the global steel market out of its current slump, and that was India.
The over $100 billion Indian steel industry is placing bets on rising domestic demand in 2016, even as local players try to combat cheap imports. Last year saw a deflation of global commodity prices, including steel and other industrial metals. This affected the Indian market, like all of the others, leading to severe pressure on the operating margins of steel plants.
Ravi Uppal, Managing Director and Group CEO, JSPL, believes that the Indian steel industry would be able to recover and show growth in 2016. He told the Economic Times that even if the industry could grow at 6% to 7%, that would translate into additional demand of 4 to 5 million metric tons of steel, which is good news for Indian steel. However, this will only be possible if adequate precautions are taken against reckless dumping by the foreign producers.
Can Indian Steel Demand Deliver?
Spoiler alert! Even if there’s unanimity on India being in the sweet spot this year, one big question remains: When will the world’s largest democracy deliver? Yes, it has a huge unfilled demand and an even bigger economy, but when will the benefits start accruing? We have long heard of the potential of mass industrialization in India.
In 2015, India became the third-largest steel producer globally, bypassing the US, with demand between April and November going up by 5.3%, and production by 2.4% in the same period. India is now positioned just after China and Japan as a steel producer.
Yet, prices of some steel products in India hit a 10-year low in 2015, no thanks to the cheap exports from China, Japan and South Korea.
Financial Pressure Via Dumping
This has also jeopardized billions of dollars in loans raised by domestic steel producers for capacity expansion. Already, the steel sector is a leading contributor to the bad loan woes of Indian banks, and some sector experts fear that this would come in the way of capacity addition.
Global ratings agency Moody’s expects profitability of Indian steel firms to be lower this year as compared to the previous years, but the country would be better placed than its peers in Asia.
The government still seems confident that India will, indeed, overcome many of these hurdles. Recently, Steel Minister Narendra Singh Tomar told news agency Press Trust of India that the steel industry was “tense” not just in India, but in the world over. In his opinion, India is better placed this year compared to other countries since both production and demand are likely to go up.
Increased Production… and Increased Tariffs
India’s top three steel producers — state-run Steel Authority of India Ltd. (SAIL), and private players Tata Steel and JSW Steel — are expected to ramp up production capacity in the next two years to capture domestic demand growth propelled by demand in the automotive, consumer durable goods and construction sectors.
Of late, the Indian government has taken steps to protect the domestic steel industry, including raising import duties on long and flat products.